Financial deepening contributes to economic development, but its effect on the carbon intensity of production is an open empirical question. If banks finance investments in new, greener technologies, they can contribute to lowering carbon dioxide emissions per unit of output. But if they finance investments in more traditional, carbon-intensive technologies, they can contribute to increasing carbon dioxide emissions per unit of output. This paper studies the impact of financial deepening—an increased provision of bank credit as a share of gross domestic product—on carbon dioxide emissions per dollar of gross domestic product in a global sample of 125 economies from 1990 to 2019. Using a local projections approach, the paper finds that, on average, financial deepening leads to a relative increase in carbon dioxide emissions per dollar of gross domestic product, indicating that financial institutions finance relatively more carbon-intensive investments and consumption. However, a better institutional environment mitigates this adverse effect of financial deepening: conditional local projections reveal that in countries with more environmental regulations, a stronger rule of law, and a financial system that is relatively more market- than bank-based, financial deepening does not lead to higher carbon dioxide emissions per dollar of gross domestic product. Specifically, the results show that countries with an initially lower carbon intensity of production can mitigate the average adverse effect of financial deepening on carbon dioxide emissions per dollar of gross domestic product by improving their general institutional environment proxied by adherence to the rule of law, and, to some extent, by developing their financial markets. By contrast, countries with an initially higher carbon intensity of production are better off focusing on environmental regulations to mitigate the unconditional adverse effect of financial deepening on carbon dioxide emissions per dollar of gross domestic product.
Authors
- Citation
- “ Fisera, Boris ; Melecky, Martin ; Singer, Dorothe . 2024 . Financial Deepening and Carbon Emissions Intensity: Evidence from a Global Sample of Countries . Policy Research Working Paper; 10948 . © Washington, DC: World Bank . http://hdl.handle.net/10986/42254 License: CC BY 3.0 IGO . ”
- Collection(s)
- Policy Research Working Papers
- DOI
- http://dx.doi.org/10.1596/1813-9450-10948
- Identifier externaldocumentum
- 34400852
- Identifier internaldocumentum
- 34400852
- Pages
- 36
- Published in
- United States of America
- RelationisPartofseries
- Policy Research Working Paper; 10948
- Report
- WPS10948
- Rights
- CC BY 3.0 IGO
- Rights Holder
- World Bank
- Rights URI
- https://creativecommons.org/licenses/by/3.0/igo/
- UNIT
- Prosperity-FCI-TIC-Mkts
- URI
- https://hdl.handle.net/10986/42254
- date disclosure
- 2024-10-16
- region geographical
- World
Files
Table of Contents
- 1. Introduction 4
- 2. Data and stylized facts 7
- 2.1. Data 7
- CO2 emissions 8
- Foreign bank 10
- 2.2. Stylized facts 10
- 3. Empirical methodology 11
- 𝐶𝐶𝐶𝐶2 𝐶𝐶𝐶𝐶2 𝛼𝛼 𝛽𝛽 𝐹𝐹𝐹𝐹 𝛽𝛽 𝐹𝐹𝐹𝐹 11
- 𝛽𝛽 𝐹𝐹𝐹𝐹 11
- 𝛿𝛿 𝐶𝐶𝐶𝐶2 𝐶𝐶𝐶𝐶2 𝛾𝛾 𝑋𝑋 𝜏𝜏 𝜀𝜀 𝑓𝑓𝑓𝑓𝑓𝑓 ℎ 1 5 11
- 𝐶𝐶𝐶𝐶2 11
- 𝐹𝐹𝐹𝐹 11
- 𝛼𝛼 𝜏𝜏 12
- 𝛽𝛽 𝛽𝛽 12
- 𝐶𝐶𝐶𝐶2 𝐶𝐶𝐶𝐶2 𝛼𝛼 𝛽𝛽 𝕀𝕀 𝐹𝐹𝐹𝐹 𝛽𝛽 1 𝕀𝕀 𝐹𝐹𝐹𝐹 𝛽𝛽 𝐹𝐹𝐹𝐹 13
- 𝛽𝛽 𝐹𝐹𝐹𝐹 13
- 𝛿𝛿 𝐶𝐶𝐶𝐶2 𝐶𝐶𝐶𝐶2 𝛾𝛾 𝑋𝑋 𝜏𝜏 𝜀𝜀 𝑓𝑓𝑓𝑓𝑓𝑓 ℎ 1 5 13
- 𝛽𝛽 𝛽𝛽 13
- 4. Results 14
- 4.1. Baseline results 14
- 4.2. Conditional results 15
- 4.3. Heterogeneity across countries with low and high initial CO2 emissions per dollar of 18
- GDP 18
- 5. Robustness checks 19
- 5.1. Alternative measure of financial deepening 19
- 5.2. Alternative identification of the effect of financial deepening 20
- 5.3. Addressing the Nickell bias and cross-sectional dependence 21
- 5.4. Alternative empirical methodology panel VAR 22
- 6. Conclusion 22
- References 24
- Journal of Economic Growth 24
- Fiscal Policy After the Financial Crisis 24
- Journal of 24
- Financial Economics 24
- The B.E. Journal of 24
- Macroeconomics 24
- Journal of Financial Stability 24
- Economic Modelling 24
- Journal of Financial Intermediation 24
- Journal of Development Economics 24
- The Economic Journal 25
- The World Bank Economic Review 25
- The State Journal 25
- Journal 25
- Economic Systems 25
- Journal of International Money and Finance 25
- Journal of the European Economic Association 25
- European Economic Review 25
- Journal of 25
- International Money and Finance 25
- Energy Economics 25
- Applied Energy 26
- Comparative Economic Studies 26
- American 26
- Economic Review 26
- The Economic Journal 26
- The 26
- Quarterly Journal of Economics 26
- Journal of Monetary Economics 26
- Journal of International 26
- Development 26
- Environmental Science Policy 26
- Econometrica 26
- Review of Finance 26
- Economic Modelling 26
- Econometrica 26
- Econometrica 27
- Journal of Financial Stability 27
- Structural Change and Economic 27
- Dynamics 27
- Journal of Applied Econometrics 27
- Journal of Development Economics 27
- Oxford Economic Papers 27
- Scientific Reports 28
- Appendix 29